Should you buy a house with monthly mortgage insurance?

By: Scott Sheldon

November 30, 2018

Buying a home can be an expensive ordeal. You don’t necessarily need 20 percent down or more to purchase a house. Whether or not you should put more money down or less money down is going to depend on what your financial scenario supports and what you are comfortable paying within your monthly budget. Here are some things to consider if you’re going to be purchasing a house with monthly PMI.

Generally, to avoid a PMI you need to have 20 percent down. Purchasing a home with less than 20 percent down is not the end of the world by any means and there are tons of programs that allow you to purchase a house with as little as 3 percent down for conventional and 3.5 percent down for government loans. Both loans mirror each other and depending on the program that you go with your PMI can be dischargeable.

When you purchase a house with less than 20 percent down the lender will assess private monthly mortgage insurance (PMI) which is to insure the lender if you default on the loan.

This is an extra cost by way of a higher monthly payment in exchange for purchasing a house with slightly less cash down. While the PMI can be dischargeable know that the alternative is to purchase a house with 20 percent down. Twenty percent down for example on a $500,000 house is $100,000. Saving for that amount of cash could take years. On the flip side if you were to buy a house with 5 or 10 percent down in the time frame that you could have saved that money the market could have reacted favorably enough for you to refinance and dropping the monthly PMI in the process.

Here’s a quick lowdown on the several types of PMI in the market…

The mortgage insurance is permanent on a FHA Loan with 3.5 percent down. With ten percent down or more the PMI can be petitioned to be discharged after 10 years with 20 percent home equity. Simply put, with an FHA loan plan on refinancing to drop the PMI in the future.

On a conventional loan you have a few more options. If you are purchasing a house with 10 percent down or more that’s the magic number that will allow you to pay mortgage insurance where you could bring your PMI pre-funded / prepaid into escrow without having a monthly PMI payment. You heard that right. Let’s say on the size of a loan that your PMI is $6,000 you could finance that $6,000 which would change your payment just a few dollars per month or you could bring in that extra $6,000 to close at escrow (which by the way can also be in the form of a gift) which would allow you to have a lower monthly mortgage payment while still being able to buy a house indicative of what your market supports.

Whether you go with monthly PMI or whether you have a single pay mortgage insurance either one is dischargeable in the future. The benefit of exploring the PMI in a single pay format is that you can easily save anywhere between $200 to $400 per month in some cases, even more by electing to finance the total cost of the PMI in the loan or bringing those funds to the table at close of the escrow both of which could offer a substantial net tangible benefit to you. If at the beginning, you don’t have quite the 10 percent you could always go with the down payment percentage that you have and refinance when you have the 10 percent home equity and dropping the monthly PMI.

The alternative to mortgage insurance is not purchasing a house. The risks associated with continuing to rent is a variable housing payment based on what your landlord dictates. Paying more in taxes and losing borrowing power is based on the direction of housing prices or interest rates.

Saving for 20 percent down or more for most people, unless they are rapidly saving substantial sums of money each month, is probably not in the cards. Nine times out of ten, market forces will move faster than your ability to save so purchasing a house that you can afford per month with the long-term picture in mind on a fixed rate mortgage is probably a safe and prudent financial bet.

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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.